Just checked my brokerage accounts that my 2012 return was 18.49% (after taxes and commissions). I usually do not use leverage, maybe I will one day if the market falls enough. 19% of my money dedicated to invest is in cash, at 2% fixed rate in a couple of Bank accounts, mainly in euros. That cash is ready to be deployed if I find some good opportunities. I invest mainly because I like it and I do not think it would get funnier with leverage or with no cash option. Cash is like a call option with no expiration date, an option on any stock, bond, real state, an option to buy any asset, with no strike price. It’s the price for being able to buy a bargain when it appears. I do not like giving that up, specially when all the market falls. Besides I can not afford the chance to go broke because I do not want to go back to the office, I can not run any chance with my freedom, therefore I eliminated leverage. The chance to go broke is significantly reduced by eliminating leverage.
Here are my year to date results versus the S&P 500 Total return, from the start of 2012 up to every following month:
Up to Month 12: 18,49% vs 16,00%
Up to Month 11: 12,44% vs 14,96%
Up to Month 10: 11,88% vs 14,29%
Up to Month 9: 16,27% vs 16,44%
Up to Month 8: 15,45% vs 13,51%
Up to Month 7: 12,22% vs 11,01%
Up to Month 6: 8,52% vs 9,49%
Up to Month 5: 2,58% vs 5,16%
Up to Month 4: 12,77% vs 11,88%
Up to Month 3: 14,94% vs 12,59%
Up to Month 2: 9,05% vs 9,00%
Up to Month 1: 5,44% vs 4,48%
Up to October I was not doing so well, probably because of my technology investments falling. I was actually buying more of them back then.
Before investing in the stock market I was working mainly as on IT contractor. I also bought some pieces of real state in the south of Chile. I bought most of it a few years back, a rather big chunk of land in Chiloe. I had to do some legal work on it in order to legalize it. It took me three years and now that all the papers are fine it has quite nicely appreciated. So I have been thinking to convert it to cash to have the option to invest it. I would have to go there to divide it and sell it as property lots. One problem is that my wife does not like the rainy weather and I don’t feel like going alone. So I have not yet decided what to do. Anyone wants to come along ?? I disclose that it’s very rainy in Chiloe so this would not be a pleasure trip. Let me know if you’re interested, I’ve been thinking about it for a long time. I’m so comfortable here that I can not make the move so I need a push. I have a hard time leaving my family. I hope I can convince them to come. I must disclose that the big island of Chiloe is very rainy, not cold though, and definitely better in a couple of summer months. But given that it’s 30 KM south of Ancud, on the east coast side, it would be more of an adventure than anything else. We would need to find and rent a cheap place to stay, close to mainly farmers. Set up a 3G internet network and basically do “nothing”. Things move quite slow down there so at least there would be a lot of time to study about investments or learn (Chilean) Spanish. Ah.. I’ve heard that there is nice fishing too so we can get some fresh air and proteins. Another alternative is to stay in Ancud which is a “city” (you could call it that) nearby. People are very nice actually. That might compensate for the rest. I’m thinking out loud but anyways it’s always nice to have the option to do something wild and it beats being in an office in several aspects.
Back to the stock market world: I have not seen in detail which of my investments were the best performers this year. I mainly concentrated on what to do with the worse ones. Mostly all did OK except some unrealized losses on my TLT shorts plus the dividends and cash I had to pay for borrowing it. Anyways now even more than before I expect interest rates to go up and TLT to pay off.
I was doing much better in August making over a 20% year to date return against the S&P total return at 12.5%. That was mainly because the dollar was so high against the euro. But when the dollar fell my dollar investments got devalued. Retrospectively I should have shorted much more dollars (short 30K US$) when it was under 1.24. But since I have much more than 30K in US stocks I took quite a hit during the last months when the dollar fell.
Looking back at the past years I think the lesson is to stay out of the market if things seem to be grossly overvalued or if you do not know where to invest. You have to literally hate losing money. Feel real pain with losses. In order to avoid them you need to be very sure of your acts. That’s why I basically stayed out in 2007 and before. Mainly because I did not feel I knew enough. Time was certainly not wasted, it was the best investment because I started to study. I read back then Philip Fisher and Benjamin Graham’s books among others. I also invested my money in real state then, in the Chiloe land, as I talked above, and others things. I used the cash I had mostly when I saw clear opportunities starting in 2008.
When the market falls a lot there are quite more opportunities. So keeping cash has been essential. And having the will to use it at the right time is also essential. I knew very intelligent people, loaded with cash, that recognized that the stock market was cheap but were afraid to act. They got paralyzed thinking about the worse. Ironically they are investing now.
Besides the exceptional returns of 2009 in the past 3 years I just had a between 1.5% and 2.5% percentage points over the US market. Quite mediocre but remarkable for its consistency. I could have gotten a bit worse results by simply buying market indexes since then and take a 3 year vacation. But to me what matters most are absolute returns and not losing. Being in the stock market has been much better than fixed income in the last years. Stocks have given excellent total returns. The advantage of active stock picking is that it forced me to study and that could prove profitable in the future. I also consider I took little risk and slept well by mainly buying good financially solid companies at low prices. Many of the 2012 investments (Intel, Dell, Applied Materials) have under performed the market up to now and should prove to be profitable in later years. I tried to only invest in what I knew well and when I clearly saw cheapness. I tried to avoid speculating. If I was not very sure I let it pass.
It’s fundamental to know yourself well and control your emotions. It’s essential to have an instinct that makes you buy or at least get seriously attracted by things that are cheap, as opposed to shunning and panicking in such cases. That instinct might get developed with education and correct reasoning. Therefore I would recommend to study a lot and dedicate full time, or a lot of time, getting informed and thinking. That should help to develop that instinct and detect opportunities. I do not think I would have performed like this if I had another full time job. Lots of opportunities would have passed by because my mind would have been too frequently elsewhere.
Studying is the biggest investment I have made in the sense that it prepared me to see and go for the strike. Maybe you think that studying Nestle (or some other company) is a waste of time because it does not seem cheap but it can prove to be a good investment in the future if it ever does.
Some words of caution: do not fall in complacency and do not rest, specially when you have done well. It can be dangerous to get overconfident. The better you have done, specially because you were pushed up by the market the more you should question what you do. Few things sedate the mind more than long market run ups. But screwing up one time can prove to be very costly. So if things get too rosy take special care. Focus on your worse investments, on reducing the risk (possible capital loss) out of your portfolio. Be careful to do that specially when times are good, do not focus too much on your gains. Focus on what is at risk. It’s something a bit like the The Gambler song from Kenny Rogers says (don’t take too literally the drinking and smoking part):
“If you’re gonna play the game, boy, ya gotta learn to play it right.
Now Ev’ry gambler knows that the secret to survivin’
Is knowin’ what to throw away and knowing what to keep.
You never count your money when you’re sittin’ at the table.
There’ll be time enough for countin’ when the dealin’s done.”
That is one of my favorite singers and songs, singing as a guest in the nice Muppet Show! Then again, besides gambling (nothing wrong with it, note that there are very rich professional poker players), there are many paths to make or lose money in the market. I guess the essence of success is to know very well what you do. In my case when I buy I personally like to think I will invest forever. I like good companies, financially strong. With no big risks or financial problems on the horizon and with cash or very good access to debt. A good company with 12-14% return on equity bought at a fair price will do much better in a few years than a mediocre company with a 5% return bought at a big discount. I focus on the areas I know. I hardly plan what to buy, I mainly act, opportunistically, when I spot the chance. Opportunities can not be planned. If a company I like and know well gets cheap on the market for no reasonable causes I might probably end up full of it. I never set a target price, I constantly revalue. I do not worry much about when to sell. If the company is good and reached a fair price I do not sell it unless it gets grossly overvalued. I do always monitor that the business remain healthy though and if it seems to have permanently deteriorated I try to sell. That way I am gaining time by mostly following what I have and concentrating on buying opportunities. Little time is dedicated to decide what to sell, like that I win time and time is money, and it’s limited. I focus on getting cheap and good companies. I do not care much about dividends. I see a dividend as a small liquidation of the company. I prefer them profitably reinvested in the business than having to pay taxes and worry about investing the cash again. I use the market mainly to compare the prices it offers to a conservative valuation. If the market prices seem cheap I try to act. I try to avoid companies with debt and focus on good management. I also like companies that are not only in good businesses but that can manage their assets well. So for example I distrust putting my money in Microsoft, even if it seems arguably cheap or has a good business. One reason I do not like it is because their management almost bought Yahoo for more than 40 Billions. They were lucky Yahoo was even more stupid to reject the offer. That example of bad asset management as well as their Skype acquisition was something that I considered bad management decisions. Bad or dishonest management decisions is something that does not pass my investment checklist.
In conclusion there is no easy formula, it’s a job as any other. Even maybe more difficult since it requires constant learning and observation. It’s a very skewed job in the sense that only a few make what a lot lose. It’s one of the few jobs where a small minority is above the average. It requires time and to use your brain a lot more than in other jobs. Then again even if you are not apt for it you can always buy market indexes on a constant basis, adding similar cash amounts every year, reinvesting dividends, and you’ll probably do quite well. But if you do like to pick stocks I would recommend to study, think and read. Select good books written or recommended by successful investors. Books have been my basis to learn about investing. But practice is of course also necessary. The more you know your companies and the environment where you invest the bigger your chances are to detect low prices and make good decisions when opportunities appear. And as I see it opportunities will always appear sooner or later.
Once again best wishes and health for 2013 !